Sunday, August 2, 2009

NASDAQ Not Worth the Bother

Courtesy of basic charting tools from Yahoo/Finance, the NASDAQ Composite provided a 6.5% compounded annual return from August 1994, before the greatest bull move since the 1920s and after the recent 50% or so move off the bottom.

The boring 30 year Treasury bond had a current yield of 7.4% in August 1994. If one bought and still held it, one would have had the stated annual cash return and would be sitting on a significant capital gain.

An interesting way to look at matters is to ask what price would have been a fair price for the NASDAQ Composite 15 years ago if today's index value of 1978 was the "fair" value today. Given that the total return from a riskless Treasury was over 8 %, let's say a 10% total return prospectively was appropriate. Certainly that looked puny after going up more than 7 times in 5 1/2 years! In any case, the actual value for the NASDAQ Composite in August 1994 was 766. The proper starting value to have yielded a 10% compounded annual return (assuming no dividends) was actually 474.

Thus the NASDAQ was markedly overvalued 15 years ago vs. today, and that ignores all the costs of actually owning the index, all the volatility, etc. Furthermore, I believe that the NASDAQ is overvalued today relative to Treasuries, adjusted for risk.

What is Microsoft doing this far into the green shoots era and 50%+ off its lows having its September quarter earnings guided massively lower?

The NASDAQ is mostly Vegas without either the travel or the fun. The brokers and underwriters whotraffic in most NASDAQ inventory laugh at people who take the stock valuations seriously.